I’m already repaying a personal loan, but due to some recent unexpected expenses, I find myself needing additional funds. I’ve come across the option of taking a top-up loan on my existing personal loan, but I’m not sure if that’s a better route compared to applying for a fresh loan. Could you explain how a top-up loan works, what the pros and cons are, and what factors I should really consider before deciding to go ahead with it?”
—Name withheld on request
A top-up loan on an existing personal loan can be a convenient way to access additional funds without going through the process of applying for a new loan. It allows borrowers to utilize their existing loan relationship with the lender to avail of extra credit.
However, before opting for a top-up loan, several factors need to be considered:
Key considerations for taking a top-up loan
• Increased Loan Burden: A top-up loan adds to your existing debt, which means your monthly payments will be higher. It’s important to check if you can comfortably afford the extra repayment before taking the loan.
• Flexible Fund Utilization: A top-up loan can be used for different purposes like medical bills, home repairs, education, or growing a business, unlike some loans that have restrictions on how the money can be spent.
• Interest Rate Consideration: The interest rate for a top-up loan is usually aligned with or slightly higher than the existing personal loan. Borrowers should compare rates to ensure affordability and negotiate with the lender on the rates.
• Loan Tenure Adjustment: A top-up loan can have the same repayment period as your existing loan or a longer one, which can impact the total amount you pay back.
A top-up loan affects the credit score in multiple ways. It increases the total outstanding loan amount, which may impact the credit utilization ratio, a key factor in credit score calculations.
Maintaining a good repayment history is crucial, as timely payments on both the original and top-up loan can improve creditworthiness, while missed payments may lower the credit score. Additionally, having a longer credit history generally benefits the score, but managing multiple loans responsibly is essential to maintaining a strong financial profile.
Before applying for a top-up loan, it is important to review the loan terms, including eligibility criteria, interest rates, and any additional fees. Borrowers should assess their financial stability to ensure that the increased EMI fits within their budget without impacting essential expenses. Exploring alternative options such as gold loans, loans against fixed deposits, or credit lines can help find a better borrowing solution. Consulting a financial advisor can also provide valuable guidance on whether a top-up loan aligns with long-term financial goals.
A top-up loan can be a useful financial tool if managed well, providing additional funds while leveraging an existing loan relationship. However, it is important to evaluate affordability, credit score impact, and alternative financing options before making a decision.
Akash Bararia is the head of sales finance at HDB Financial Services Ltd.
